Impact of Detariffication (Part 1)

Detariffication had been implemented in other market like China and India, and therefore, in the experienced of detariffication, the impact on financial realism of insurers caused by the unhealthy competition has become one of the main concerns. Nevertheless, the general insurance market of Malaysia is normally seen as being comparatively well placed compared to China and India, in working into detariffication. The intensity of price combats in Malaysia can be reduced to a certain extent by having a Risk Based Capital (RBC) Framework in position forward of detariffication. Furthermore, Malaysia has a standpoint to advantage from the experiences of other markets in the preparation of detariffication for the industry. In the case in China, tariffication is once again being reintroduced after detariffication is implemented for three years as it is needed to be re-imposed to govern the amount of losses grieved by the industry on deteriorating prices account, growing commissions and other expenses. As for Malaysia, it is more unlikely to involve in the same condition.

According to Subramnian (2011), detariffication eliminates the control of price in the market and result in an extreme reduction in premium rates being offered by the insurance companies in the soft-market. As the excessive of the capacity available, otherwise the low demand of insurance in the market, hence, it is unsustainable to have business for the insurance company at the prevailing rates, making an increasing in stressing the capital constraint of several insurance companies.

Now let us look further into the impact of detariffication on the premium level which is expected to be different across production lines. The general impact is impulsive in motor insurance, however, it is probable that the Motor-Act cover, and can be witness a significant increase in rate if detariffed. Along with the decrease in potential rate in Motor Non-Act cover, this can be cancelled especially for the private car and potentially motorcycle segment. In the long run, the cross-subsidization between Motor Non-Act cover and Motor Act cover will be reduced expectedly while in the current situation, it is relatively important as it is cover. As the commercial vehicles segment is underpriced, hence, it then expected to have a uplifting rate. (Sabhlok & Malattia, 2014)

Conferring to a latest survey conducted by Towers Watson, over 45% of the general insurance professionals polled predicted motor premium rates to decline while around 35% of them estimated rates to rise, at the same time as the rest sensed that motor premium level will persist approximately unaffected. The poll itself illustrates that there is a substantial amount of ambiguity and dissention in the impact of detariffication for Motor insurance.

Additionally, the impact of detariffication on average fire insurance premium level, average motor insurance premium level and commission level.

The impact of detariffication on average fire insurance premium level

The impact of detariffication on average motor insurance premium level

The impact of detariffication on commission level

For Fire Insurance, the overall rate will drop in the general consent, exclusively for the tariffed residential and commercial business lines which are considerably profitable. A gradual decline in the rates are expected over the time for residential cover as this is characteristically traded in conjunction with mortgages through a banc assurance channel, where generally competition may be limited due to tactical partnerships. For the tariffed commercial business, the estimated rate dropped is at a quicker bound. Although there are some elasticity in rate setting for self-rated and specifically rated risks, if insurers are permitted freedom to regulate their own prices without respect of tariff rates, the competition will be intensify.

As noted earlier, detariffication will ended in amplified competition amongst insurers, improved product diversity and developing consumer preferences. In such situation, the distributor role develops even more critical as they can help consumers to traverse through the countless of product selections, same goes with the act as the standard bearer of their respective principals in effectively promoting their products in a aggressively competitive market. The dissemination channel assortment for Malaysia has persisted comparatively firm over the last the five years. Agents, who included Motor Vehicle Franchisees, have accounted for about 60% of the total GWP. Conversely, the channel assortment is estimated to have some changes in the “provider agnostic” channels’ favor, like Brokers and Banks, who can spot themselves as performing in the concern of the customer while assisting them recognize the finest product from the numerous possibilities that are existing in the market.

Suppose that detariffication also contains freeing up commissions open to intermediaries, and then insurers may start offering greater commissions to attract and retain distributors, further straining the inclusive profitability of the insurers or value offered to the customers or both. The industry is the present view that commissions would either remain the same or surge post detariffication.

References

11.      Sabhlok, R. & Malattia, R. (2014, August). Detariffication in Malaysian General Insurance Sector – What to expect?
Retrieved February 29, 2016 from https://www.towerswatson.com/en-MY/Insights/IC-Types/Reprints/2014/08/Detariffication-in-Malaysian-General-Insurance-Sector

22.      Subramnian, V. (2011, December 8). IMPACT OF DE-TARIFFICATION ON PROFITABILITY OF NON-LIFE INSURERS. DE-TARIFF – IMPACT, p.9.
Retrieved March 2, 2016 from http://www.actuariesindia.org/GI/V.%20Subramanian.pdf